How to Find Your Place in the API Economy
APIs (application programming interfaces) may seem like arcane programming tools but they are an essential part of a “big wave” phenomenon that will have a universal impact on organizations. APIs build bridges between applications; they help us order a pizza or book a hotel room online and make the Internet of Things possible. In this essay, adapted from Driving IT Innovation: A Roadmap for CIOs to Reinvent the Future, authors Heather Smith and James McKeen of Smith School of Business, Queen’s University, provide a big-picture view of how APIs will create new opportunities for organizations to build value together. Driving IT Innovation is based on insights drawn from focus groups with senior IT executives and managers.
In the API economy, APIs act as the digital conduit linking services, applications, and systems. They enable organizations to share data and applications using easily accessible standards and platforms. These, in turn, allow businesses to make the most of their data to create compelling customer experiences and open new revenue channels.
In short, the API economy is the commercial exchange of business functions and capabilities using APIs. It has captured the attention not only of software developers, but also of strategists and business leaders seeking to move to the next level of marketplace differentiation.
What this means is that organizations won’t act as lone entities anymore. In the API economy, companies will work together to create more value than either of them could independently. Moving forward, APIs will redefine the nature of partnerships, allowing companies to collaborate without the traditional need for extensive negotiation and customization of systems.
APIs are also the enablers that turn individual businesses into platforms. As one researcher states, “It’s not enough for a business to serve its customers and make money. It has to be a platform and you can’t be a platform without APIs.”
“It’s not enough for a business to serve its customers and make money. It has to be a platform and you can’t be a platform without APIs”
And it’s not an option. Focus group participants noted that APIs are being forced on them in a variety of ways. “Our regulators are now requiring us to provide APIs,” said one member. Another stated, “In banking, if you want to participate in foreign exchange, you must use them.” “APIs have already externally changed the game we’re in,” said a third.
In our present economy, products and services from a supplier are pushed to customers either directly or through intermediaries. In the future, APIs will evolve from enabling simple connectedness to supporting remote interactions across a network, to platforms where APIs facilitate and accelerate new service development, to ultimately becoming the actual product or service a company delivers. As such they will become the fuel that keeps companies competitive and drives a significant economic shift. In an API economy, the products are APIs and the market is global.
How Platforms Will Morph
The API economy can thus be viewed as a set of business models and channels that provide secure access to functionality and data. These create a platform that attracts partners who will build on it and create complementary products and services. Together, all entities affiliated with a platform act as a business ecosystem that builds on the strengths of others, takes advantage of shared affiliations, and draws in new participants.
By connecting people, businesses, and things into digital platforms through APIs, the API economy will be driven by a different economic logic. Platforms will serve as mediating entities that create value by facilitating interactions between agents that operate on different sides of a digital market. And the pace of change will constantly accelerate through re-combinations of resources and knowledge. A platform’s success will depend not only on the platform’s owner but also on its members’ ability to innovate.
When a platform has attained a critical mass of participants, entry barriers will be high. Competition will be about who has the best platform strategy and the best ecosystem to back it up. Differentiation will come from the APIs available and how motivated developers are to create applications using them.
10 Questions: What Do APIs Mean For Your Organization?
Regardless of the starting point, there are a number of common questions that companies will need to address when beginning to work with APIs, although these may have different answers depending on the approaches used. These include:
- How should we establish options for our future with APIs?
- Which of our products or services would benefit from APIs? How can we improve our understanding of the different approaches involved?
- If we are building external APIs, which internal APIs might they depend on?
- How can we motivate and manage both internal and external developers using our APIs?
- How can we attract and build partnerships to enhance our API strategy?
- How can we best integrate complementary products?
- What monetization strategy should we use: free; pay per use; tiered access; revenue sharing; subscription; or premium access?
- How will our architecture need to change with our API strategy?
- How should we assess the quality and value of an API?
- How will we manage an API’s life cycle over time?
Heather Smith is a senior research associate with Smith School of Business at Queen’s University and co-author (with James McKeen) of eight books. She is also a senior research associate with the American Society for Information Management’s Advanced Practices Council. James D. McKeen is Professor Emeritus at Smith School of Business and Senior Vice President and Chief Technology Officer at Empire Life Insurance. He has worked in the IT field for many years as a practitioner, researcher, and consultant. Learn more about Driving IT Innovation here.